Interchange Vs. 3 Tier Pricing

Perhaps the most confusing thing in the world of merchant processing is the cost structure itself. Small business owners often expect the cost of accepting credit cards to be a lot like paying the cable bill. This is the merchant processing CHEAT SHEET!

An educated consumer will call multiple Cable/Satellite TV providers to find out each of their monthly flat rates before choosing the company to sign up with. This tendency to believe there is just a generic "rate" spills over into their consideration of a merchant services provider.

An experienced processing account executive will be perplexed when questioned on "the rate they charge" for accepting cards. Visa has 122 rate categories that can be assessed to the merchant depending on the card type and how it's taken. MasterCard has 289. If you would like to know your rate, you will need to be read a list of 411 categories just to get started. These 411 cost categories are called Interchange. See Visa's here: SHOW ME THE RATES!!!



That brings us to the most popular pricing method in practice today, Interchange Plus. Essentially you will agree with your merchant services provider to pay a fixed rate on top of the Interchange cost of each transaction. For example, Half of 1 percent (50 basis points) above the true Interchange cost. If Visa charges the merchant service provider 1.79% for a Delta Sky miles rewards card that is swiped, then the business owner pays 2.29%. If MasterCard charges 1.29% for the Debit card that was taken, then the business owner is charged 1.79%. Of the 411 potential transaction types you can have, the business owner is paying the true cost of the transaction for Visa or MasterCard plus a premium to cover the service of their Merchant Services provider. The only rate that can be discussed here is "the rate above interchange", which in this case is .5%.

Don't let that fool you if you're accustomed to the second most popular method, a 3 tier system. Unscrupulous merchant providers may tell you that they are offering 1.69% or something similar as "their rate." This is most likely just the first tier of a 3 tier system.

The first tier is generally referred to as the Qualified Rate. These are basic credit cards that are swiped face to face.

The second tier is the Mid Qualified Rate. Your cost of taking the card will generally fall into this category if your customer is using a rewards/sky miles card (very popular) or if the sale is keyed into the terminal rather than the card being swiped. This is usually assessed as a surcharge on top of the Qualified Rate. If you're told that your Mid Qualified Rate is '.86%', please make sure to add that to your Qualified Rate to find out the real cost(1.69% in this example + .86% = 2.55% )

The third tier is the Non Qualified Rate. Your cost of taking this card will generally fall into this category if your customer has a corporate card, the address or zip code provided don't match the card holder's on file, certain cards that are keyed into the terminal, or sales that fail to be settled (or batched out) through the terminal within 24 hours. This is also usually assessed as a surcharge on top of the Qualified Rate. If you're told your Non Qualified Rate is 1.3%, please make sure to add that to your Qualified Rate to find out the real cost (1.69% in this example + 1.3% = 2.99%)

WAKE UP! YOU'RE HALFWAY THERE!

SO, HOW CAN THERE BE 2 COST STRUCTURES?!
In actuality, there's just one, the Interchange method. If you are on a 3 tier system, your merchant service provider is still paying Visa and MasterCard in accordance with the 411 cost categories. What they are attempting to do to help(or even confuse!) the business owner is simplify the 411 categories into just 3 generic ones. What they set each of these tiers at, all depends on the kinds of cards the customers in your area are using. If 100% of your customers have a Rewards card then you should be paying most attention to your Mid Qualified Rate. If your sales are all Business to Business and you take corporate cards most often, your Non Qualified Rate is the most important.

SO AS A BUSINESS OWNER, WHAT DO I NEED TO ASK FIRST?
First ask your prospective merchant services provider if the cost structure is Interchange Plus or 3 tier. If It is 3 tier, make sure you find out the rate of all 3 tiers. If the representative can't answer or doesn't understand your question, RUN FOR THE HILLS!

HOW DO I KNOW IF I'M SAVING MONEY FOR REAL?
If it's an Interchange structure, than you should be able to determine that .4% above Interchange is lower than .5% above Interchange based on a simple glance and know that money will be saved. If it's a 3 tier system, it's harder. Unless all 3 tiers proposed to you are cheaper than all 3 tiers you have now, you can't know for sure! That brings me to the next big thing.

SEND THE PROSPECTIVE MERCHANT SERVICES PROVIDER A RECENT STATEMENT
If the rep you're speaking to doesn't know your current pricing, then both of you will have no way of knowing if money is actually being saved. I understand the allure of shopping around and getting "quoted rates" before you send anyone a statement or sign a piece of paper, but you really must. If you're having trouble reading your statement, request that the representative outline in pen for you to see how much you're being charged and where. If they refuse or don't know how, RUN FOR THE HILLS AGAIN!

STAY AWAY FROM QUOTED RATES OVER THE PHONE
This is a repeat of above but it must be said again. If the representative does not know your current cost structure and have an idea of the type of cards you're taking, then the quote is meaningless.

BUT WAIT I'M BEING CHARGED 25 CENTS FOR A TRANSACTION, HOW DOES THIS FIGURE IN?!
There are other cost categories such as transaction fees, monthly fees, batching fees, annual fees, and other assorted fees that will certainly have a major impact on the ultimate cost. But If you don't know the differences between 3 tier and Interchange then you never stood a chance to make the assessment and the best decision anyway.

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